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Customer due diligence (CDD) is the risk-based process a financial institution uses to verify who a customer is, understand who ultimately owns or controls them, learn why they want the relationship, and monitor activity over time. It is not just an identity check at account opening: the institution must also assess whether transactions fit what it knows about the customer and the risks involved.
What customer due diligence means
In anti-money-laundering (AML) controls, CDD is how a financial institution builds and maintains a sufficiently reliable understanding of a customer and the customer relationship. The Financial Action Task Force (FATF) sets an international baseline in Recommendation 10. It describes identifying the customer and verifying that identity with reliable, independent information, then extending checks to beneficial ownership, the purpose of the relationship, and activity over time. FATF standards are implemented through national rules adapted to local circumstances, so the exact legal duties vary by jurisdiction. FATF Recommendations
A beneficial owner is the natural person—or people—who ultimately owns or controls a customer, or on whose behalf a transaction is conducted. For companies and other legal arrangements, identifying that person can require understanding the ownership and control structure. Definitions and identification rules depend on the applicable law and customer type.
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1. Identify and verify the customer
The institution establishes who the customer is and verifies the information using reliable, independent documents, data, or other information. FATF Recommendation 10 describes this as “identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.” FATF Recommendation 10
2. Identify beneficial owners
When a customer acts through a company, trust, or other legal arrangement, the institution takes reasonable steps to find and verify the people who ultimately own or control it. For legal persons and arrangements, that means understanding how ownership and control are structured—not stopping at the name of the entity or its immediate representative.
3. Understand the relationship’s purpose
The institution obtains information about the intended nature and purpose of the business relationship. This helps it establish a customer risk profile and recognize when later activity does not fit the expected use of the account or service.
4. Monitor the relationship and transactions
CDD continues after onboarding. The institution scrutinizes transactions throughout the relationship and checks whether they are consistent with its knowledge of the customer, the customer’s business, and the risk profile. Where necessary, this includes considering the source of funds. The institution may also need to maintain or update customer information as part of risk-based ongoing due diligence.
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CDD is not a single checklist applied identically to every customer. FATF says the extent of measures can be proportionate to the risks associated with a customer, business relationship, or transaction. Higher-risk cases call for enhanced due diligence (EDD); simplified measures may be available for some lower-risk circumstances when the relevant country permits them. The particular checks and thresholds are set by applicable local rules and the institution’s risk-based procedures.
| Approach | When it may apply | What changes |
|---|---|---|
| Standard CDD | As required for the customer and relationship under applicable rules | Establishes and verifies identity, identifies beneficial owners, understands the relationship’s purpose, and supports ongoing monitoring. |
| Enhanced due diligence | Higher-risk customers, relationships, or transactions | Requires more intensive measures, with the precise steps determined by the applicable rules and risk assessment. |
| Simplified measures | Some lower-risk circumstances, where permitted by the country’s rules | May allow less intensive measures; it does not override local legal requirements. |
When checks happen—and what if they cannot be completed?
Under FATF Recommendation 10, customer and beneficial-owner identities should generally be verified before or while establishing a business relationship, or before covered occasional transactions. A country may allow verification as soon as reasonably practicable after the relationship begins when the risk is effectively managed and waiting is essential to avoid interrupting normal business.
If an institution cannot meet the applicable CDD requirements, FATF says it should not open the account, establish the relationship, or carry out the transaction—or should terminate the relationship—and should consider whether to file a suspicious transaction report. The precise obligation and reporting route depend on the jurisdiction’s implementing law.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How the U.S. CDD Rule applies
The U.S. example is FinCEN’s Customer Due Diligence Rule for covered financial institutions. Its four core requirements are to identify and verify customers; identify and verify beneficial owners of companies opening accounts; understand the nature and purpose of customer relationships to develop risk profiles; and conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information. FinCEN CDD Final Rule
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For this U.S. rule, FinCEN describes beneficial owners as individuals who own 25% or more of a legal entity, along with an individual who controls it. That threshold is specific to the U.S. rule; it is not a universal definition or threshold for CDD in other countries.
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Optional U.S. relief for later accounts
FinCEN’s FAQ, updated May 6, 2026, says a covered institution may elect relief allowing it to limit beneficial-owner identification and verification to a legal-entity customer’s first account, later facts that reasonably call the reliability of earlier information into question, and needs arising under its risk-based ongoing CDD procedures. The relief is optional for the institution, not a general exemption for customers or a rule for other jurisdictions. Check the current FinCEN CDD Rule FAQs for the operative details.
Certification forms are not mandatory
FinCEN’s beneficial-ownership certification form is optional. Institutions may use another method that satisfies the substantive requirement. FinCEN certification form
CDD, KYC, and AML: how the terms relate
AML is the broader set of controls intended to prevent and detect money laundering and related financial crime. Know your customer (KYC) commonly refers to identifying and understanding customers as part of those controls. CDD is the risk-based process that covers customer and beneficial-owner identification, understanding the relationship, and ongoing scrutiny. The terms overlap in everyday usage, but the legal scope of an institution’s duties comes from the rules that apply in its jurisdiction.
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